Surveillance: Severe Recession with Roubini (Podcast)

at Surveillance. We've had some optimism out there. We've had a lot of measured views of a measured recession. Neira Rabini flat out doesn't agree. He's chief executive Officer Rebini Macro Associates, who joins us now here and will continue on radio into our next hour as well. I have talked about Villain Bowder's rigger this weekend and looking at t P I which to cut to the chase he thinks as complete folly as well, what was it like when you walked in his office at Yale University decades

and decades ago. Well, he was the one who hired me at Yale, so it has been a great intellectual friend, always a rigorous, very opening your native and so on, and mostly right YouTube and mostly right YouTube. The gentleman from Netherlands and the gentleman from Mitan Bull in Italy. You too have an old world view? What is the old world view of this recession, this slowdown that we're in where maybe it's a mega threat. As your new book is called this this this new world, It's all

going to be fine? Is off the mark? Well, now the consensus view is becoming that hard landing is likely as opposed to soft landing. But now people say, well, be short, shallow, mild plane, vanilla, you know, garden variety. I beg to disagree. I think that many reasons why we're gonna have a severe recession and a severe that and financial crisis ratios are a historically high for and

twent of GDP and advanced economies and rising. Lots of zombie corporation, household government financial institutions were built out during COVID. This time around, we're tightening in monetary policy. During the seventies we had stagflation, but that racis were low after the GFC where the dead crisis, but the inflation was falling deflation because it was a demand shock, and you're

a credit crunch. This time we have staclationary negative aggregate supply shocks and that racis that are historically high and in previous recession like the last two, with massive monitoring fiscalism, this time around gonna go in recession by tightening monetary policy. We have no fiscal space. So the idea this is going to be short and shallow. It's a totally delusional out of their COVID disaster. Can China come to the rescue? If we see resurgen Asian growth, does that help us well?

If China were to grow faster than otherwise, that would help everything. All sequel, But until November, until she is re elected, going to keep their zero tolerance COVID policy, and the overall policies are essentially against economic growth. Yes, political objectives already distributing wealth and income is at the backlash against the private sector, against the tax sector, and so on. And I don't think that the Chinese policies are going to change. That are bound to have low

economic growth. They have high that ratios. They'll be lack if the next few years have four percent growth, most likely lower than that. You're not going to be a source of growth for the global economy. A lot of people look at the lack of leverage, at least financial market leverage into what we saw leading up to the two thousand and eight crash, and they say that alone will allow this recovery to be quicker and allow the

downturn to be more shallow. Where do you see nodes of leverage that could be unwound or be unwieldly, they could actually cause what you're looking for. Well, first of all, there is leverage in the corporate sector that ratios are

very high for some subset of the corporate sector. It's through the banks now are not as leverage because after the global financial crisis they deleverage, but there's been a rise significantly of the debt and the leverage of the non bank shadow financial system leverage, a loan, cellos and you name it, and those spreads already widening and there could be a shutdown of them of those markets if you have a severe recession. So I would say corporate first,

then shadow banks. Many sovereigns are in trouble. And there's half of the household sector that there's low income, is fragile, has a lot of that not much wealth and in recessional risk of unemployment. So even the household sector is divided. In the past, the financial sector has led the economic sector. You've seen the financial meltdown and then some people people would say cast right, and I'm thinking about the two thousand and seven two eight bust and then the two

thousand and nine recession. Is this time different? Are we going to see the economic downturn before the markets wake up to the reality that you're talking about and start to respond en suit. Yes, the economic downturn this time around is going to lead to severe that distress. I would say, you're going to see parts of the corporate sector going bass, will see the parts of the shadow banking system going Bass, will see the household sector that

is partly fragile going in trouble. You'll see some sovereign going trouble. Yeah, they trigger for the financial distress is going to be a recession. And recession is not milch shallow, but it's going to be severe and protracted, and there will be then afficious cycle within the real side and the financial side of the economy. In this tag inflation, do you believe with so many guests on this show, I've said today that we have seen the peak in tenure yields for this cycle. Um No, I expect that

inflation is gonna remain persistently high. There are actually medium term forces gonna lead to stag flation over time. Protection is when the globalization reshoring a manufacturing from lock host to high cost, aging of populations, restriction to migration, the coupling between US and China, global climate change, cyber warfare,

new pandemics, backlashing, its inequality, weaponization of the dollar. People are not thinking about the medium term and the medium term I see in my book, but at least a dozen different types of stagflation and medium term shocks. Gotta keep growth low and cost of production. We're going to continue this on radio, but I gotta ask one question for a television audience and for those worldwide. Did really really listened to New Rubini? Have you ever been this

gloomy before or is it a different gloomy? Well, it's a different grouping. I was gloomy right before the global financial crisis. Sertain Davos come on, We Satin Davos over a beverage, and you absolutely nailed that. That's why people are listening now. Well, I think in some sense right now is worse because in the seventhies, as I pointed out, we had stagflation, but that ratio were law, so there

was not a dead crisis. There was one in Latin America, and after the GFC we had the dead crisis, but we had the low flation and deflation. I think that this time around you've got a confluence of stagflation and of a severe dead crisis. You have a stagflationary that crisis, so it could be worse than the seventhies and POSTFC. Really continuing radio Dr Roubini, you dont want to make clear he will not be a stranger. And of course

an important book coming out. It's a kind of book where if you're an optimism and you've optimistic and you flat out and disagree with Nora Robini, you still got to read the book to frame out your thoughts to push against mega threats. Will see that. I believe in October they we have a new estimate, a new stock market killed some SMP five hundred year end price target forty two hundred down from forty seven. It's Laurie Canvasino of MPC and she joined us right now Laurie, great

to catch up with you. Why that down? Great, Let's stop write that. So look, I think that targets are always challenging in years like this, and frankly, the market broke lower than we thought it would earlier in the year. What we wanted to do with this target was signal that we do see upside between now and your end. We think there's a decent chance stops bottomed in mid June, and if they didn't, we think we could probably get

that before the end of the third quarter. But really we wanted to send the signal that we thought there was some modest upside between now and year end, that we do think you need to be leaning into recession rebound plays as opposed to really kind of leveraging up on the defense the defensives here, which we think are overbought and over sold. Um. I will tell you John that some of my sentiment models tell us that my

original forty targets probably still the right one. But when we look at our cross asset analysis stocks versus bonds, that really does temper our enthusiasms. Well, this is important, Sarah over in Europe this weekend aggressively rights take risk in credit, Sarah says, grab a six to seven percent coupon, get your foot in the water, let's go. You're saying the same thing on recession rebound. What does the recession

rebound sector or part of a sector look like. So some of the areas that typically do well are things like financials and technology stocks. These are areas that typically underperform in the draw downs and outperform on the rebounds. So those are two areas we like. We think the financials are dirt cheap at this point in time. Our banks analysts are very, very constructive and think that even if we do have a mild technical recession, that banks will execute very well through it. Then how will you

use the GDP statistics and review this week? I get it's a first look and all that, but if the banks are doing well, that means we underestimate the resiliency of the consumer. Do you buy that line? I think that the banks are telling you if you look through some of the reports that we've seen so far, is that the consumer is at a very good starting point to whether whatever this economic storm ends up being called.

And I think that's one of the lessons that equity investors have learned over the last four or five years, Thomas that every time we enter one of these dicey periods in the equity market, whether it was the trade war, whether it was the pandemic itself, whether it was simply sluggish growth out there, that the consumer is pretty resilient, and that consumer part starting point does seem to be very very strong right now. I think that's getting lost

in some of these recession discussions. Hello, the big theme then, Am I playing the inflation story still or pivoting to slow of growth? Which one? Is it a bit of both or one or the other. I would a little bit of both. You know. We get asked a lot about stagflation, and what we've told people is that we do expect inflation rates to moderate, but they could stay high relative to history. For that, I think you want

to keep some energy in your back pocket. I'm a little bit, you know, concerned that we may not be out of the woods on energy in the very short term, but longer term, if we are in that staglationary environment, I think you want to play there. I think that technology is a great way to sort of play that slowing growth theme, and we do see the market starting to shift away from these overvalued, over crowded defensives back towards more reasonably valued secular growth areas of the market,

like big cap technology. And I think that one of the things we've learned the last few years is that these big cap software companies in particular, are the tools that companies used to fight just about whatever battle gets thrown their way. So if you think that we're sort of hitting the bottom in here, that we're gonna get perhaps a better path from the FED, that the consumer is going to stay resilient, but things aren't gonna be all roses and sunshine. I think technology is an area

you really do want to look at very hard. LORI, how do small caps fit into this? Considering that you're now going overweight small cats heading into what most people think is the US for session. So look, I think you have to really evaluate what do you think has been priced into different points in the market, different parts of the market. At this point in time covered small caps for a long time leads, so we know that they always have a very hard pivot midway through recession.

They tend to really underperform hard heading in and on the way down initially, but they tend to really experience that pivot and outperforming the late parts of recession and on the way out. What we see, in particular when we look at small cap performance against economic indicators like jobless claims and I S N manufacturing is that small caps are already trading as though we've had a spiking jobless claims and as though I S M manufacturing has

plunged and hit typical trough like levels. So I don't really need to have that are we having a recession? When is it happening? Debate within small cap They are already pricing then, and it's more clear to me in that part of the market than just SUP any other part. Do you think that this means that small caps are ahead of the rest of the market, or is this leading indicator that we're already in recession? As good as is going to get confirmed on Thursday with that second

quarter GDP print. I think it's gonna be interesting if you do get a negative GDP print for the quarter, whether or not people view that as a recession. I think that debate will rage on. But I do think that small caps are very economically sensitive because they do have primarily most of their revenues coming out of the US. So if there was a technical recession in place, small caps were going to have snipped that out. Um, and it will really make sense kind of the carnage we've

seen in that space. Frankly since March of last year. I could make that, you know, kind of move that we've seen make a lot of sense. But frankly, lest it already makes sense based on what you're seeing in im manufacturing right now. Laurie, great to catch up with you, and thank you for issuing the down grade before the appearance and unlike some guests who do it after the interview. Cavasse and if I let us get a handle on where we're going to the FED meeting, and that involves

actually doing economics at Columbia University. He took, uh, macroeconomics kind of sort of three oh one, and Bruce Kasiman joins us know from a small bank, JP Morgan this morning, I love it. Bruce fer Alwis says, it's a kind of sort of recession. What kind of sort of recession is this? Well, as you know, there's a good chance second quarter GDP will print a negative for a second quarter in a row in Q two. UM, as you

kind of break down the data. With job growth so strong, with what we continue to expect to be a positive consumer spending number UH in this week's report, it doesn't feel like a normal break into what we would call a recession, and I think we should We should recognize that about the first half, but at the same time, we should recognize the momentum loss that we had at midyear. UM, we're gonna probably print a second negative consumption number in

a row this week for June. As you've noted the survey data for July, the flash p M I s were ugly. We're not just seeing that in the US, We're seeing it elsewhere and claims arising. So what feels like a technical event as we moved through the first half of the year could easily turn into a real recession event as we go through the next couple of months. In your spreadsheet, you've got a one off on exports

this quarter. Is it export growth to the rescue? UM, There is some support there, particularly as we see China and Asia lifting after what was a big second quarter set of lockdowns, but with the dollar rising and with Europe very much in the crosshairs of a recession right now, I would not be counting on on exports saving US here. I think the saving grace has to be the business sector bending, not breaking in the face of the drags that we're seeing. Also inflation coming off in the summer,

with gasoline prices starting to move lower. Bruce, I'm looking at certain data pauns. You're looking at the same ones. Claims a higher the last few weeks. The p m I last week was really bad. We're starting to see this show up in housing, Bruce. I'm trying to work out which part of this is desirable, the intended consequence of what the central bank is trying to do, and which part of it is undesirable. Well, I don't the movement towards softer growth is undesirable on the part of

the Fed. That's what they want. They want to slow the economy, they want to take out the demand component of inflation, and then they're hoping that that, with the moderation of some of the drags, gets you back to something more acceptable. However, and I think this is really what's behind your question. The momentum loss. There the idea that layoffs are starting to rise, that's starting to push together a dynamic which traditionally has been recession and recessions.

We should understand in US context is a breaking, it's a move up and unemployment rates of two percent or more. That's the risk here is that we're letting something take hold here that's going to give us a much sharper move than anything like what you might characterize the first half of the year is looking like. Embedded in John's question, Bruce, is the fight that is articulated in the article on Bloomberg the houses of Morgan divided Morgan Stanley disagreeing with

your own JP Morgan. And when the FED is going to reverse course, pause and then start cutting rate after raising rates? At what point is the softening that we're seeing in data now reflection of a FED that will be able to backtrack as soon as next year. Well, I actually think that's far sooner than next year. Uh, we're looking for seventy five basis points this week. We're looking for more open ended guidance. I don't think they're going to commit to a size of a move at

the September meeting. September is a tough call. I think we probably still do get a fifty at the September meeting. But beyond that, if we're seeing the economy really soften, job growth slow towards zero, I don't think the FED is going to continue to be tightening here at an aggressive pace. We've got them pausing at about three fifty. We don't have them easing at this point because we don't have a real recession call in our forecast um.

But I think it's about the economy. If the economy starts to slow, given that the FED gets rates into a modestly neutral stance, the the equation changes at the FED. It's not there today with a level of ray. It's an economy that's still generating over four jobs a month, but it will be there in three or four months if we're right, Bruce. What's enough to cause the FED to take a step back? I mean, there's an unemployment rate at four and a half percent, is it inflation

coming down to five from nine point one percent? How far do we have to see progress? And I put this in quotes when it comes to the deterioration in momentum does the FED have to see before perhaps taking a break? I think the short answer to that is the FED needs to have a policy stance of trajectory on inflation and dynamics on growth. That gives them comfort that in a year two year and a half time inflation is going to be below three perils and the

job growth we're seeing now is not there. Three or four months from now, I payil growth is down to a hundred thousand, and the run rate on inflation with energy prices off is moving more into the point three percent per monthly base. Um, we think you could you could easily be in that in that zone. First year update please on emerging markets, the currencies give way, I am told conversation after conversation, this time is different. All

my radars up. Well. I think the currencies give way creates more risk here, especially since we're not going to see the relief on central bank policy. I think where this time is different as in the larger e M economies. And there is a certainly a significant problem in low income economies facing problems with food security and debt dynamics.

But in the larger e M economies, you just don't have the debt overhangs, you don't have the current account imbalances, and you have policy makers that have been willing to continue to use fiscal policy so growth is slowing. E M is certainly a threat if the US and Europe go into a sssion, and we shouldn't lose site of

the European recession story. But we don't think there's a systemic magnifying effect through credit, which is often the case when you see some of these dynamics take place in the M and pretty swam risk the leverage right now? Can we finish that because whenever we talk about this recession story, you've acknowledged the risk in America, you've acknowledged the risk in Europe in AM Yet we keep hearing the same thing that consumer advantage seats a strong, corporate

Bannagh sheets are strong. Why do you think the leverage is going to show up? Well, that's the interesting question is are we going to see the dynamic on growth which still has a healthy private sector uh, you know sort of cushion here? Is that going to get magnified by credit? It certainly isn't happening yet, but there's certainly signs of stress building. And you know, I think there's

always the underlying point here. When you're raising interest rates and slowing growth, you can be surprised that where something shows up that doesn't um you know, seem to be a big story. I would worry about European banks here in an environment in which we're seeing I think more sharp slow down and growth than we're just getting the ECB going. I would worry that some of the smaller em economies show more tendency to spill over in ways

we're not expecting. From a geopolitical point of view and from a credit market point of view, there are things there. But I'll tell you for sure, I always am surprised where these things show up. But I think we shouldn't lose sight of the context that this is an environment where that's a likely outcome also gonna catch. I'm gonna get your views on a range of things. Bruce Castmanett of j K. Mulkin. Stephen Englander is esteemed in foreign exchange analysis. He has flat out the best cross rate

strategist in the world. He joins US now as standard charter. Steve, your view is an outlier. We go to three point zero percent and then we stay there for something like five or even six quarters. If we get a Stephen Englander outcome way below the gloom that's out there, what does that do to the certitude, the belief and a resilient and strong dollar, it's going to damage it. I think that the market is waiting to see, um, you know,

clear signs of a recession. I mean their designs are powerful but not definitive yet, and they're waiting to see some sign that inflation is coming off. We think all of that will begin to occur in UH to four and um, you know, we think the Fed will call it quits at that point. That the sort of saying, look, we're going to wait and see, um where inflation goes until you know, before we start we keep on hiking. What size of big figure move does that mean for

the dollar? I mean, are you looking for five or ten big figures of euro strength off of your three point zero percent? And stay there? US call mostly but yes, but mostly in three I think, um, there's still some you know risks that um you know a that the you know, profits stay weak or look weak, and that the equities come off. We're still not sure what's going to happen in China or what's going to happen in

Europe over the winter. So we think that's you know, the risk on trade is going to be harder than the market thinks over the last week. But three I think will be a week dollar year, and five to percent is perfectly reasonable. So five isn't necessarily ten obviously, but this is a big differential when it comes to how much some of risk assets can rally on the heels of that. What will be the driver here? Is

it euro's strength or is it dollar weakness? More broadly, in a phase of more optimistic sentiment and risk assets, I'd say it's the second. I think the key thing is to get some evidence that inflation is is coming down and notwithstanding some of the pessimism. UM, what we've seen is that wages are lagging, so there's no sort of red hot labor market pushing up inflation. Real wages are are falling like a rock. Um, we're likely to see uh, some of the you know, demand destruction leading

to price falls and energy prices. We're ready seeing that even in things like cars and some other goods. UM. I don't know that this this inflation is going to be permanent, but I think the the outlook over the next year is actually pretty good, and I think that west the market sees that. UM, it's a risk on market you know, both hands. Steve is incredibly lonely. I mean, you know, everybody's out of three and a half percent,

and John helped me here, we're out of four. It's city group, you mean, some of it's a huge, huge differential, folks. I really can't say enough about it. What what do you say to people that are convinced they're just gonna keep going and going and going. What will be the damage to their portfolios? Steve? Well, look, I think a very famous economists once everybody's got a plan until they get punched in the face. And right now, um, you know, we we haven't seen the downside on the economy. Labor

market numbers. Look okay, you know there's there's you know, no big unemployment. We we think that that pickup is coming, and when it comes, the pressures on the FED are going to be different, and and the FED itself. It's not even you know, sort of responding to a shift in the political climate. It's the idea that if the unemployment rate is going up, it means that demand is below supply, and every model they have tells them that

that means inflation comes down. It's it could come down a little bit quicker, come down a little bit slower, but it means that they've sort of got themselves on the track that they want to be. Having gotten on that track, you know, why keep pushing it? Since the big uncertainty, if you're at the central bank, is not what the neutral rate of interest is, because they don't

have a clue, and and nobody's got a clue. The big uncertainty is how fast the economy is responding to h the tightening of monetary conditions, and how fast inflation is going to respond to that. And only time will give us that answer because we don't have any good

models for that. Stephen, given with the last point that you made that we don't have any good models for this, can you give us a sense in your history strategizing about markets how uncertain this scenario is, how much of a lack of a conviction you have over a dollar call at a time when the dollar has really been one of the most difficult calls to get right. Well, it certainly it's been difficult to get right, but right now everybody's got dollars, and you know, markets very long.

I can't think of a currency that's long versus the usd at this stage. And I think that the you know, what you're seeing is not evidence that the U. S. Economy is better than in some ways than everybody else. What you're seeing is indications that, um, the world is such a scary place that the only you know, the only currency asset you want to hold is dollars. I think once those fears received, the dollar is very vulnerable.

And and you know, again it's a three story. At one point we thought this might be a story before the Russian invasion. It wasn't the case. But I think you have to see continued, like you know, a terrible world continuing for dollar strength. Um, you know, to to keep going in the way it has them. Stave awsome, gonna get ave you on things as things evolve over at the same as standard chat as stay congling too. That This is the Bloomberg Surveillance Podcast. Thanks for listening.

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